INVESTING IN AUCTIONED HOUSE AND THEN RESELL: TREND RETURNED

5/16/2013 5:28:44 AM

Right now it is tough to buy bank repossessed properties,so in its place we have houses renovated by investors and then put out to sell. There are two sources for that: one,professional investors went directly to courthouse to bid on auctioned houses and renovate them and then sell; two, banks take those houses with very poor conditions and sell them by bulk to certain institutions, which in turn find investors to renovate and then sell. Although by law these houses have to be put on the market for at least two weeks, during which time they can only be sold to owner/occupiers, in reality, in this market where supply is low, these houses have designated buyers prior to coming on the market, so that an ordinary buyer cannot compete for them.

Some buyers now feel that, on the one hand, they cannot compete and get to buy the houses they want to buy, and, on the other hand, they think there are huge profits in buying houses they can renovate and sell, so they want to attend auctions themselves to bid for houses. They do not realize that, without enough information, rushing into the auction market is like gambling, the risk is tremendous. Even if they do not suffer bad consequences, the gain is usually minimal.

The main reason is that, unless the investor has followed a certain auctioned property for a period of time, he has very short time to do any homework. Just which batch of properties are to be auctioned off and at what starting bid prices are not certain until just one day before the auction actually taking place. Therefore, the participants usually work as a team, with some check property rights, some going all over the places to physically check the properties and estimate their repair costs.

The biggest risk of bidding on these properties is not knowing for sure of their property rights. The auction could be initiated by banks, by HOA or by local government’s tax unit. If one is not careful and bought a property as second lien holder, then finds out a bank has the first lien, then he will lose all his money. This happens quite often. Also, there are other property rights defects, such as delinquency in utility payments, HOA fees, property taxes, and there maybe litigations. The creditors may put liens on it. In some properties the previous owner may still occupy the premise. If he only ask for moving expense, it would be easier to handle. The concern is that he may trash the place before leaving.

Another risk is not checking the condition of the property thoroughly. After winning the auction, one then finds out that the estimated costs of repair and the actual costs of repair are far apart. Additional fund will be required. Usually, properties in the auction that require major repairs are likely to find no bidder, so, they become bank repossessed properties. They will then be sold in bulk to certain institutions. These institutions will hire architects and contractors, and they will pay for building materials and hire inspectors. It is a time consuming process. To put all these into a cost analysis, their average profit for each house is anywhere from $10,000 to $15,000, and that is not huge profit. One actual example here: Mr. Zhang recently bought a house for $155,000. He later found out that the previous buyer paid $100,000 in an auction for it. So, he felt cheated, that the previous purchaser gained $55,000 in a quick transaction. However, he did not know that the previous buyer paid the previous owner $3,000 for him to move, paid $10,000 to HOA to clear delinquent fees, paid $20,000 to renovate, paid $2,500 transaction fee and $9,500 commissions. The gain is only $10,000.